Bank of America Chief Technical Strategist Anticipates 10-12% Pullback In Nasdaq
Mary Ann Bartels, BofA's technical research analyst looks at the NDX large spec positions reported in last week's COT report, and does not like what she sees: "Large speculators aggressively bought NDX futures last week to a net long of $3.2bn notional from $0.8bn notional previously. Readings are in a crowded long. Between mid Feb and early April of 2010, HFs accumulated NDX aggressively into a crowded long position and S&P 500 went up 7.9% for this time period. The market corrected 10.2% from the peak crowded readings in the NDX in later April and May. We are estimating a market pullback of 10%-12%."
Of course, while this may make sense from a purely technical perspective, the fact that cross asset correlations are at a record, will mean that either the NASDAQ 100 is ridiculous overpriced relative to the Russell and the S&P, or that speculators have merely been chasing the highest beta, and a flush has yet to be confirmed based on sell off trigger levels in the SPX and the SUT.
On the S&P speculative position:
S&P 500 Large Spec positions: Large speculators partially covered their shorts in S&P 500 futures to a net short of approximately $4.1bn notional from about $8.0bn notional previously. Readings are neutral.
And on Russell:
Russell 2000 Large Spec positions Large speculators slightly covered their shorts in the Russell 2000 futures last week to roughly $2.7bn notional from $3.1bn notional previously. Readings are neutral.
Bartels summary observations on various asset flows is as follows:
- Equities. Large specs continued to cover the S&P 500 and Russell 2000 index futures but remained net short in both; they bought NASDAQ 100 into crowded long.
- Agricultures. Large specs bought Soybean but sold Wheat. Corn and Soybean remain in a crowded long.
- Metals. Large specs bought all metals last week except for platinum. Copper is in a crowded long.
- Energy. HFs bought Crude oil and marginally covered their shorts in natural gas.
Natural Gas positions remain in a crowded short.
- Forex. HFs sold US Dollar last week; they bought Euro and Yen. JPY is on the edge of becoming a crowded long.
- Interest Rates. Large specs bought 2-year Treasuries; nevertheless they sold 10-year and 30-year Treasuries. This implies expectation of a steeper yield curve.
And here is how BofA estimates Hedge Fund exposure in the market:
Examining HF positioning by major strategies
Equity Long/Short funds market exposure we estimate was slightly above 18% net long, still below the historical average range (35-40%). Market Neutral funds held stead their equity exposure at just above 50% long / 50% short benchmark. Our models indicate Macro HFs continued to cover their shorts in US equities and commodities, while selling EM and EAFE long exposures.
Alas, while we respect Ms. Bartels, we have to vigorously disagree with the assumption that shorts have covered into this rally, as the last update on NYSE short interest indicates.